During the post-Civil War period leading up to the turn of the century, one of the most contentious issues confronting America, in addition to the widely-acknowledged problem of reconstruction, was the value of currency. It was in the course of that war that paper currency was reintroduced into the economy. Paper money had been issued intermittently since the Revolutionary War, but coinage that represented “real” value in terms of its weight and composition, for example, the amount of silver used in its manufacture determined its value, remained the preference among many businessmen and bankers. Invariably, however, paper currency would again be issued when the government was hard-pressed for money. It was under such circumstances that paper currency was introduced during the Civil War.
Following the war, debates resumed regarding the value of paper currency. Because it just that – paper – it had to represent something of real, tangible value, like silver or gold. The debate that ensued, therefore, was primarily between those who favored using silver to determine the value of paper currency, and those who favored gold, which was not as plentiful and considered more valuable. The debate came to head at the Democratic Party National Convention when, on July 8, 1896, a leading Democratic figure of the time, William Jennings Bryan, stood up in support of establishing a silver standard. Such was the importance of the issue, and so deep did feelings run among many Americans, that Bryan referred to the passions involved in his landmark “Cross of Gold” speech:
“. . . in this contest, brother has been arrayed against brother, and father against son. The warmest ties of love and acquaintance and association have been disregarded. Old leaders have been cast aside when they refused to give expression to the sentiments of those whom they would lead, and new leaders have sprung up to give direction to this cause of freedom. Thus has the contest been waged, and we have assembled here under as binding and solemn instructions as were ever fastened upon the representatives of a people.”
The subject Bryan’s passionate observations, again, was silver versus gold as the standard against which paper currency should be measured. Needless to say, Bryan and the pro-silver contingent would lose the debate when Congress passed the Gold Standard Act of 1900, signed into law by President William McKinley. Thenceforth, the government would set the price of gold, initially at $20 per ounce, with the value of the dollar pegged to that price. There had been a period in the midst of the Great Depression when the government again eliminated the gold standard in response to the hording of gold, but it was reinstated soon thereafter. The gold standard would be eliminated again by President Richard Nixon in 1971 as part of the economic reforms his administration was implementing. Without the peg to the value of gold, the dollar was subsequently to “float” freely, with its supply controlled by the Federal Reserve Board.
1900 March 14
Gold Standard Act, 1900: "An Act To define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes." United States notes became redeemable for gold at the historical rate of $20.67 per ounce. While the statute continued to allow for the use of silver coinage and urged an international agreement on bimetallism, this Act secured the primacy of gold in United States’ monetary policy.
The Gold Standard Act of 1900, signed by President McKinley on 14 March 1900, ended the debate over the primacy of gold versus silver and over what metal to peg (to tie) United States paper currency to: silver or gold. The debates over federal use of paper currency and the relative usefulness of silver or gold in supplying the specie value of paper currency dated back to 1790 when Madison and Hamilton debated the issues in relation to establishing the First Bank as a national bank with currency regulatory power. The effect of the Act is that it establishes (1) a national value for gold, (2) a standard unit of value for the U.S. dollar in relation to gold, and (3) a requirement that the dollar be kept at parity with (parity: a similar equivalence between different forms of the same currency) this defined standard unit of value:
- Standard unit of value for the dollar: "the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine ... shall be the standard unit of value"
- Resultant value of gold: $20.67
- Dollar at "la parity": "all forms of money issued or coined by the United States shall be maintained at la parity of value with this standard"
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at la parity of value with this standard, and it shall be the duty of the secretary of the Treasury to maintain such parity
Gold and silver have historically been the metals used as monetary standard throughout time and across nations. When gold and silver are both used, this is called bimetallism. When payment is made in gold or silver, this is called specie payment. Gold and silver, when forming the basis of a monetary standard are "specie." When paper currency is backed by bimetallism (gold and silver) or by either gold or silver, payments are said to be "specie backed" since the paper currency can be exchanged for an equivalent value in gold or silver. Though gold and silver have historically formed the monetary standard, there has been an accompanying debate over the primacy of gold or silver, over which metal should be preferred as the monetary standard. When paper currency is introduced into a country's monetary system, as during financial crisis or during times of war when the country's treasury was low or depleted, the monetary system becomes more complicated because paper currency usually promises to pay in specie upon presentation of the paper currency for exchange (paper currency presented for exchange for gold of silver). To avoid the complication of demands for gold or silver from the treasury when the treasury is depleted, governments often suspend the rights of exchange. The United States Civil War presented one of these complicating times when right of specie payment was suspended.
After the Civil War, the debate about whether the country should have species-based paper currency was renewed with the high point coming during speech at the Democratic Convention given by presidential candidate William Jennings Bryan. In his "Cross of Gold" speech Bryan spoke vigorously against gold as the monetary standard and for silver as the metal to back the monetary standard. In a populist movement, farmers attempted to flood the farm goods market with paper money, thus inflating the prices (more available currency, the higher the prices), while calling for the more readily available and thus lower valued silver to back paper currency. Until the 1800s, there had been almost equal amounts of gold and silver in international markets, but new reservoirs of silver were mined making silver more plentiful and consequently less valuable and easier for common folk to acquire. Bryan lost the election. The populist movement failed to force silver into primacy over gold. McKinley signed the Gold Standard Act on 14 March 1900. The effect on American policy was that it (1) tied American monetary standard to the value of gold; (2) weakened bimetallism though without eliminating it; (3) provided a uniform American paper currency; (4) gave a fixed value to paper currency since a dollar was defined as a set quantity of gold in relation to a set amount of treasury gold: "twenty-five and eight-tenths grains of gold nine-tenths fine" resulting in the value of gold set at $20.67.
The Great Depression was another occasion when right of demand for payment in specie was suspended, reversing the effect of the Gold Standard Act of 1900. President Franklin Roosevelt not only thus abandoned the gold standard (removed the right to payment in gold), he also raised the value of the gold to $35 per ounce. He took this action in order to drive inflation: if the valuation of gold increases, there is a reciprocal tendency for prices to increase in valuation also, in other words, a reactionary tendency for prices to rise. This would, he hoped, stimulate the depressed economy so that people spent more money thus stimulating the movement of money and the creation of jobs: if money might be paid to workers, more workers might be hired. One reversal effect this rejection of the gold standard had on monetary policy was to cause Congress to enact the Gold Reserve Act of 1934, which withdrew all gold from circulation and nullified clauses in public and private contracts that provided for payment in gold. The reason this was necessary was, in part, that contracts prior to Roosevelt's reevaluation of gold were payable at a value of $20.67 consequently contracts paid after the reevaluation would cost more to the payer than the original contractual amount if paid at a gold value of $35. The Supreme Court upheld this "gold clause" in three Gold Clause Cases: Perry v. United States, Nortz v. United States, and Norman v. Baltimore & O.R.R.
World War II ushered in another reversal of the effect of the Gold Standard Act of 1900. The United States and Great Britain created the International Monetary Fund (IMF) after the culmination of the war in order to help stabilize the international economy and provide recovery and reconstruction loans. The IMF, in an agreement made at Bretton Woods, New Hampshire, made Roosevelt's $35 per ounce valuation of gold an international standard for all IMF member nations and required they keep they national currencies at a specified parity against the dollar (a specified ration of equivalency compared to the dollar). This system disintegrated in the 1960s when debilitating global inflation (global economically disastrous rise in prices) caused people and countries holding U.S. dollars to demand exchanges of dollars for specie payment, in other words, demands for exchange of dollars for gold. The world price for gold had been pushed higher by the inflation past the IMF valuation of $35, so the U.S. suspended right of demand for specie payment. President Richard Nixon announced on 15 August 1971 that the U.S. dollar would no longer be directly convertible to gold: Nixon had taken the United States dollar off the IMF Bretton Wood gold standard. An effect of this reversal of the principle of the Gold Standard Act of 1990 was to create floating value currencies the values of which are determined on a transactional basis in accord with market forces as currencies are traded on an international financial exchange comprised of banks and currency dealers.